Pension plan would put strain on system

Stephen FranklinTribune staff reporter

United Airlines' plan to walk away from its pension obligations stirred a new round of concern on Friday about the nation's troubled pension guarantee system.

Officials with the Pension Benefit Guaranty Corp., the federal agency that pays the pensions of 44 million workers because failed or ailing companies stopped doing so, said the drive at United to dump its underfunded plans could snowball through the struggling airline industry and jeopardize the long-term solvency of the agency.

Taking on the pension obligations at United would cost the agency, which hit a record deficit of $11.2 billion last year, more than $6.4 billion. The agency estimates that the shortfall among all the U.S. airlines is running at about $31 billion.

"This is very serious. This would put enormous pressure on other airlines to follow down the same path in order to remain competitive," said James Klein, head of the American Benefits Council, which represents the nation's major pension providers.

The added economic pressure on the agency could lead it to raise premiums or to change pension rules, Klein said. And those actions, he added, would create more uncertainty for pension providers.

Saying it must trim employee expenses in order to emerge from bankruptcy, United on Thursday told its unions and workers that it plans to replace its pension plans with a less costly, defined-contribution plan like a 401(k).

The airline's announcement was its first to detail a timetable for changing to a different system. It first signaled the prospect of scuttling pension obligations in July.

If the airline wins bankruptcy court approval for its plan, it would pass an $8.3 billion pension obligation to the PBGC. The agency has said it will pick up $6.4 billion of the airline's pensions, leaving a $1.9 billion loss for United's employees and pension holders.

That would be the largest pension default in the agency's history. Bethlehem Steel's $3.7 billion pension collapse in 2002 has been the largest to hit the agency.

Dallas Salisbury, head of the Employee Benefit Research Institute, a non-partisan think tank in Washington, D.C., sees a similar danger for companies and workers if the PBGC's financial problems mount.

"The higher PBGC premiums go, it just creates added pressure for other employers to completely get rid of their benefit plans," he said.

Ultimately, he said, the rising costs nurture a "death spiral" for traditional pensions.

The agency's funds come from company-paid premiums, not taxpayers. United has paid about $50 million in premiums over the years to the agency, PBGC officials said.

Once United notifies the agency and its employees of its intention to halt its pension plans, it has 60 days to win bankruptcy court approval, said Randy Clerihue, a PBGC spokesman.

The airline must show the court that shutting down its pension plans is necessary for it to become solvent again, Clerihue said.